What data needs to be opened up to tackle tax havens?

How to tackle tax havens and how to open up official data were two of the headline topics at the G8 Summit in Northern Ireland last week. But unfortunately the bold plans and commitments that many were hoping for did not materialise.

It seemed that the G8 countries might lead a new global initiative to open up data that is needed to tackle tax havens. But commitments from G8 countries in this area were weak, and their plans remain unclear.

What went wrong? And what needs to happen next?

Bermuda – commonly held to be a tax-haven

Tax havens thrive on secrecy

As you’ll probably know, many of the world’s biggest companies – from Amazon to Apple, Google to Starbucks – have been accused of avoiding tax by setting up complex international networks of shell companies, and defining legal relationships and shifting assets between these companies in a way which means that, overall, they pay as little tax as possible.

Chris Taggart of OpenCorporates, an independent initiative to create an open database of the world’s companies, commented:

When we’re talking about tax havens in fact we’re usually talking about secrecy havens – jurisdictions whose primary attraction is not acting as a neutral or low tax base, but one where secrecy and obfuscation is an essential part of the package. This is clearly essential for money launderers, fraudsters, or those involved in corruption and organised crime. As OpenCorporates’ pioneering work mapping corporate networks shows, they are also used by large corporations to hide their complex networks and legal structures from tax officials, shareholders and competitors.

Greater transparency around tax havens depends on having information about who owns these companies, how they are related, and how money flows between them.

Who is really in charge?

Shouldn’t much of this information already be public in things like national company registers? In principle it should, but unfortunately many of these are incomplete, poorly maintained and – crucially – many only list nominee directors and nominee addresses. This last bit point has received significant attention over the past few weeks and at the G8 Summit.

There have been widespread calls for registers which list the beneficial owners of a given company. Beneficial ownership means whoever it is that benefits from the ownership of a company, not just whomever it is convenient to put down in the company registration form for the purposes of obscuring real ownership and interests.

Who gets to know who is really in charge?

While it is a major step that G8 countries have publicly recognised the importance of beneficial ownership, they have missed a major opportunity in not connecting this to their support for “open data by default”, as outlined in the new Open Data Charter. They announced that:

Beneficial ownership information on companies should be accessible onshore to law enforcement, tax administrations and other relevant authorities including, as appropriate, financial intelligence units. [..] Countries should consider measures to facilitate access to company beneficial ownership information by financial institutions and other regulated businesses. Some basic company information should be publicly accessible.

While there is mention of some public disclosure, the emphasis is very much on governments having and exchanging this information between them, not on public access.

By contrast, there looks to be strong consensus amongst many civil society organisations that this information needs to be public.

As Gavin Hayman at Global Witnesssuccinctly put it “Ultimately, every single country – and their offshore tax havens – must commit to making company ownership a matter of public record.”

We think that public access to information about the beneficial ownership of companies is essential – and furthermore that this data should be made open as per OpenDefinition.org – so that the public are able to use, publish and share it without restriction.

“Tax authorities are not the only stakeholders impacted by tax haven activity” he said. “Many eyes can help to spot errors and abuse that tax authorities will never see.”

The next generation of company registers

But is better information about company ownership enough?

Richard Murphy advocates an approach that he has helped to develop which he calls country-by-country reporting, and which would see multinational corporations required to disclose information which would give a more joined up global picture of their operations – including which countries they operate in, the names of all their companies in every country, and information about their trading and tax in each country.

Heather Lowe from Global Financial Integrity also commented that releasing more detailed company accounts “will very likely cause a company to consider whether it wants to take a very aggressive tax position if the results of its actions will be open to public scrutiny”, adding “there are some questions that a company is going to want to avoid, but the information has to be available to allow the public to ask those questions”.

We hope over the coming months G8 countries will join the dots between their commitments to opening up their data and their commitments to tackling tax havens – by mandating and publishing more open data about companies and their global operations, and by encouraging other countries to follow suit.

3 responses to What data needs to be opened up to tackle tax havens?

I agree that transparency is generally a good thing.But this article illustrates the pitfalls of a debate where data and analysis is being ignored, as much as it does the case for more data.

You say “As you’ll probably know, many of the world’s biggest companies – from Amazon to Apple, Google to Starbucks –have been accused of avoiding tax by setting up complex international networks of shell companies, and defining legal relationships and shifting assets between these companies in a way which means that, overall, they pay as little tax as possible. “

This isn’t quite right. What they have been primarily accused of is paying less tax than appears to be morally defensible; not of doing anything illegal, secretive or even particularly unusual.

The problem of secrecy afforded by complex networks of shell companies (which should be addressed through beneficial ownership rules, I agree) as Chris Taggart highlights, is that it enables companies to hide illicit financial flows and other misdeeds, and avoid legal measures to bring them to justice and recover assets.

I don’t think this is what the Amazon, Starbucks and Google cases are about. Rather, they arose because the companies have high revenues but pay low taxes in the UK …”therefore they must be doing something dodgy and hiding it” (goes the reasoning). But the thing is that corporate tax isn’t paid on revenues but on profits so comparing these two data points is meaningless (and therefore our initial moral instincts may not be reliable guides on the matter…).

So what are they actually doing?

Amazon does not pay much tax in the UK. It makes all its sales across Europe through its Luxembourg business, making profit there rather than setting up a separate “permanent establishment” (PE) in every country where it sells to and running a wholesale-retail between them.

Starbucks has not paid any UK tax, due to loss making years (and losses carried forward into profitable years). It is alleged that Starbucks have boosted these losses through profit shifting, by paying interest on intercompany loans, paying a markup on the coffee it buys through Switzerland and paying a royalty for the use of the Starbucks brand. None of this is hidden from the taxman, and its
all subject to regulation.

Google does not pay much tax in the UK. It books its advertising sales in Ireland instead of setting up a PE in every country in Europe. During the Parliamentary Committee questioning it was accused of having a PE in the UK because it has sales staff here, but it responded that HMRC have had a good look at these
arrangements and say they do not constitute a PE.

Apple has a big store of cash from non-US profits which it keeps offshore rather than repatriating it back to the US where it would be taxed. This is reported in its annual accounts.

These do not appear to be cases of tax evasion or abuse run amok because of secrecy. They are companies that, as far as we can tell, are acting within the spirit and the word of the law but coming up with tax numbers that ‘feel wrong’.

Of course there may be arguments to change the law (e.g. from a transfer pricing system to unitary taxation). But looking at the numbers, I am not sure that these are the best companies with which to make that case.

Amazon, Google et al are not representative of ‘many of the world’s biggest companies’ (or indeed the world’s worst tax evaders) what they are is some of the world’s best known American brands. Sometimes pressure focused on brands can shift the needle where regulation is ineffective. Sometimes it can be used to drive pressure for better regulation. But sometimes it can be a distraction.

These storm-in-a-teacup cases highlight the danger that public outrage may be focused on the wrong companies and is not being informed by robust analysis of the data we have.

For me, the exciting thing the open data movement is not just about getting more data into the public domain, but also about using it robustly, and getting numbers and analysis into public debate. Analysis of data allows us to get beyond simple which-side-are-you-on good guy/bad guy heuristics than we often rely on for judgement.

I would love for the OKFN to convene a broad discussion about what kind of tax information should be in the public domain, and how it can best be used.

At the same time I don’t think we should rely on ‘many eyes’ for tax compliance. Payment of taxes is matter for the rule of law and the first priority must be to make sure that tax authorities around the world have the information and capacity they need to track down and prosecute those involved in tax evasion, fraud, corruption and money laundering.

Starbucks may be the kind of company that can be embarrassed over its tax affairs (even when there appears to be nothing dodgy going on), companies that are really up to no good are more likely to be both immune to that kind of pressure and too obscure to attract public attention.

Nowhere in the article do I allege that the major companies that you have mentioned are doing anything illegal. I am well aware of the distinction between illegal evasion and legal avoidance. But I do disagree with you in that just because what they are doing may be legal – and, as you comment, may not be that unusual – this does not mean it is right or acceptable. There are times when there may be a gap between what is right and what the law says. This gap is what makes change possible and, sometimes, necessary.

I also think that this gap – between what is legal and routine on the one hand, and what is right on the other hand – is precisely why more company information should be opened up to public scrutiny. Official processes may often focus on detecting and tackling illegality, and may have limited scope for dealing with things which are legal but nevertheless wrong. Hence increasing scrutiny from the public, the media and civil society organisations – and public pressure for reform.

Yes I agree with the principle – something may be legal and still not
right, and sometimes the role of data is to show up that inconsistency so we can push for a change in the law.

I just think that the Amazon/Starbucks/Google cases really don’t
illustrate this – so they are not a useful guide to policy reform.

From what i can see tax bills took up 78% of Amazon’s consolidated income in 2012. Starbucks made a loss in the UK, which meant it had no tax to pay here, but by paying royalties
to the company in the Netherlands it increased its overall tax liability.

I still can’t figure out what is it that they have done which is legal but wrong?

If we see more and better information as a solution, we have to be open to looking at the data and changing our minds (I assumed Starbucks, Amazon etc… were bang to rights when I first read
the stories, but then I looked at the data…)

Global Integrity estimate $5.86 trillion of illicit financial flows were lost from developing countries from 2001 -2010 due to crime, corruption, tax evasion, and other illicit activity – data that helps to tackle the gap in legal enforcement seems like the most serious priority.